Spurious Correlation

AAA

DEFINITION of 'Spurious Correlation'

A false presumption that two variables are correlated when in reality they are not. Spurious correlation is often a result of a third factor that is not apparent at the time of examination. Spurious comes from the Latin word spurious, which means illegitimate or false.

INVESTOPEDIA EXPLAINS 'Spurious Correlation'

According to the skirt length theory, many people believe that short skirts are used to predict that the markets are going up. And if skirt lengths are long, that it means the markets are going down. Some would argue that this is a spurious correlation and that each event occurs because of a random third variable such as warmer-than-expected weather or income levels.

RELATED TERMS
  1. Positive Correlation

    A relationship between two variables in which both variables ...
  2. Stepwise Regression

    The step-by-step iterative construction of a regression model ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock ...
  4. Leading Lipstick Indicator

    An indicator based on the theory that a consumer turns to less ...
  5. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston ...
  6. Correlation

    In the world of finance, a statistical measure of how two securities ...
RELATED FAQS
  1. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  2. What is backtesting in Value at Risk (VaR)?

    The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >>
  3. How much variance should an investor have in an indexed fund?

    An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >>
  4. Can the correlation coefficient be used to measure dependence?

    The correlation coefficient can be used to measure the linear dependence between two random variables. The most common correlation ... Read Full Answer >>
  5. How do you calculate variance in Excel?

    To calculate statistical variance in Microsoft Excel, use the built-in Excel function VAR. Given a set of numbers value1 ... Read Full Answer >>
  6. What's the difference between a confidence level and a confidence interval in Value ...

    The value at risk (VaR) uses both the confidence level and confidence interval. A risk manager uses the VaR to monitor and ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  2. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.
  3. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  4. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  5. Investing

    The Labor Market Recovery’s Missing Ingredient

    Job creation is running at the fastest pace since the 90s, and there is some evidence that wage growth is finally starting to accelerate, albeit modestly.
  6. Trading Strategies

    Best Undergraduate Degrees For Day Traders

    We look at some popular undergrad majors for those wanting to begin a career in the exciting world of fast-paced trading.
  7. Fundamental Analysis

    Explaining Standard Error

    Standard error is a statistical term that measures the accuracy with which a sample represents a population.
  8. Economics

    Understanding Economic Order Quantity

    Economic order quantity is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory.
  9. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  10. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center